Property tax revenue: Awaiting the trickle-down

The difference in local governments’ taxing abilities from state to state is playing a significant role in how quickly economic recovery trickles down. Property tax caps are hampering recovery, although municipalities in some states have the ability to levy an income tax in addition to the local property and sales tax.

The good news ıs ın. Accordıng to a recent Moody’s report, property values are on the rise, albeit slowly. While this trend is favorable, local governments are finding their hands tied when it comes to capturing additional revenue from property tax growth because of the actions of states and the attitudes of voters toward property taxes.

The National League of Cities recently completed its own extensive survey, “Cities and State Fiscal Structures,” which highlights city and state revenue sources. Christy McFarland, NLC research director, noted that generally speaking, most cities are seeing property values increase in both residential and commercial properties.

Some areas are seeing more improvement in property values than others, she noted. In general, the Northeast is a little stagnant. However, compared to other regions, they experienced growth early on during the recovery.

“Large metros are doing better; they are experiencing an influx of population growth. Metros in the South and Southeast continue to grow,” she said. Even so, “We still are not seeing the rate of growth needed. We are still only at 90 percent of the property revenue seen pre-recession.”

External factors like state caps are often negating that growth for local governments. Property tax caps exist in many forms: rate caps place a ceiling on the property tax rate itself; assessment caps limit the annual increase in the assessed value of the property; and total levy caps restrict the annual increase in a locality’s total property tax revenue. Caps of varying degrees exist in many states.

Director of State Affairs Chris Hackbarth with the Michigan Municipal League said back in the 1990s Michigan passed a proposition that limited property taxes to 5 percent or the rate of inflation, whichever is lower.

When property values decreased in the state during the recession, many local governments were impacted.

“For Wayne County and other townships it will take decades to comeback if they ever do,” he said. “Our communities that weathered pretty well have the opportunity to grow — they can capture and take advantage of that (property value) growth.”

With the cap, property tax increases are only allowed through new development, which has proven detrimental to already built-up communities.

While Michigan is recovering, Hackbarth added, it’s not coming back quickly. This is underscored by the state property tax report and the Mackinac Center for Public Policy, where only a slight increase from $12.8 billion in 2013 to $13.0 billion in 2014 was noted in the amount of property taxes collected in Michigan.

“The existing property rate is not bouncing back,” Hackbarth noted. However, revenue is there if there is room to build. “We are seeing growth, there is new construction happening; it’s just the really built-up, stagnant cities that are struggling.”

Prior to the recession a lot of development was occurring in Michigan. Then some went into bankruptcy with the economic downturn.

“We were seeing a lot of residential developments sitting vacant,” he said. However, now they are displaying positive signs of recovery. “They are getting bought up and there is new home construction.”

To aid with recovery efforts and support struggling local government, MML will focus on municipal finance for the next two years.

In Michigan property tax increases are only allowed through new development, which has proven detrimental to already built-up communities.

According to Hackbarth, in years past most local governments’ income came from community property taxes and revenue sharing with the state; however, there has been a $6.2 billion loss in revenue sharing, which coupled with the hit to property tax revenue. “It’s a system that really needs fixed.”

Florida is one state seeing growth in its property values, though it, too, has yet to reach the highs of the pre-recession era.

“2007 (tax roll) is where we peaked at $31 billion,” said Ken Small of the Florida League of Cities. “It dropped almost $7 billion (during the recession).” Fortunately, the 2013–14 tax rolls show a recovery of approximately $2.3 billion, which still shows room for improvement when compared to 2007’s high.

In particular, rural areas in Florida are seeing growth. Small noted one mayor of a rural city near Miami saw a 9 percent increase last year. “She’s expecting another robust growth.”

Florida does have limits on property tax and local governments’ abilities to increase it. In January 1995, the state amended its constitution to limit the annual assessed value of property to 3 percent of the change or the Consumer Price Index, whichever is less. Additionally, certain millage rate guidelines must be followed. Local governments, however, are responsible for administering property tax, according to the Florida Department of Revenue, which then provides oversight and assistance to local government.

If local governments are using property taxes for infrastructure projects in Florida, Small said they would be doing so indirectly. “They can go to voters with a referendum,” he said. But largely local governments are using other options. “The local option sales tax for infrastructure is a big one.”

Still, Small estimated the uptick in property values will continue in most areas of Florida. “Some will be left behind — some near the urban areas.” He noted it’s hard to determine why growth eludes some pockets and not others.

In some places of the country, states are allowing more flexibility and power when it comes to local governments’ taxing abilities. Municipalities in Alabama, and two of Missouri’s largest municipalities, for example, are authorized to levy an income tax in addition to the local property and sales tax.

McFarland stated property tax is often about the relationship between cities and their state. In Texas for example, cities have traditionally enjoyed more free rein. She said local governments there receive less state aid and in return enjoy more local ability to raise taxes, but “There are bills in the (Texas) state house to control that.”

Similar efforts to limit the power of local taxing entities appear to be increasing across the U.S. McFarland said, they are now seeing a potential shift from cities having more local taxing power to them having less, with more state oversight. Local governments’ abilities to levy taxes will continue to be a topic of discussion, particularly as municipalities continue to recover from the recession and search for needed funds to keep operations afloat. Many municipal leagues are backing their local governments in the search for funding to help fill infrastructure needs, services and more.